Customer Aggregation: Disruptive Technology-driven Energy Business Model

Disruptive technology is changing the way we think about energy demand.  But more than that the technologies being used to assess, capture and create a market in demand response and energy efficiency are being combined with the new FERC rules to create a nationwide standard for payments by regional transmission organizations for demand response.  These actions open the door for scalable growth from customer aggregation in the transforming energy value chain.

For as long as we can remember energy demand tracked changes in gross domestic product or economic growth.  In a growing economy we used more energy to produce the goods and services it required. Electricity demand growth enabled economies of scale from the post world war II period to the late 1970’s oil crisis.  During that period as demand grew new base load generation usually fueled by coal that was added to the installed base had the effect of reducing the average cost of service.  So the more power generation we build to serve our growing economy the cheaper it was to produce each unit of energy.

All that changed when in the midst of building the first generation of nuclear power plants, our nation faced raging inflation, high interest rates and oil price shocks that drove up the cost of everything.   Nuclear power plants were a victim of disruptive technology gone wrong.  Too cheap to meter turned into too expensive to continue to build.  Many of the planned nuclear power plants were cancelled.  Those that were completed and put into service drove up electricity rates in the markets they served beyond levels anyone imagined possible. But all the while, energy demand especially electricity demand largely continued to track the growth or contraction in GDP.

Fast forward to today, FERC estimated that demand response programs reduced 2009 peak electricity demand by 37 gigawatts and projects that 188 gigawatts could be saved in 2019.  In California by 2012 more than 650,000 commercial and industrial buildings will peak day pricing rate structures along with demand management systems both to save money by using energy more prudently and efficiently but by time shifting their use to avoid high prices during peak periods.  Disruptive technology is making this optimization possible through smart meters, predictive analytics and better control systems including constant energy management  and automated demand response in C&I applications using sensors and software to manage pumps, motors, lighting and other equipment.

This sector of the energy value chain is both growing and consolidating positioning for market leadership in the era ahead when the profit potential now found mostly in the C&I sector will extend to residential customers.  The current leaders in this sector include:

  • CPower (acquired by Constellation Energy)
  • Comverge
  • EnerNOC (acquired Energy Response Pty Ltd, largest DR provider in Australia and New Zealand)
  • Honeywell (acquired EMS Technologies)
  • Johnson Controls (acquired Energy Connect)
  • Schneider Electric

The Energy Independence and Security Act of 2007 adopted by Congress required FERC to do a national assessment of demand response potential and to develop a national action plan on demand response. The Commission produced its National Assessment & Action Plan on Demand Response in 2009 and an initial action plan in 2010.  On July 5, 2011 FERC published its Implementation Proposal for The National Action Plan on Demand Response Report.

The reason demand response is growing is FERC requires Regional Transmission Operators (RTOs) and Independent System Operators (ISOs) “to pay demand response providers the market price for energy for reducing consumption below their expected levels.”  This creates a market for demand response and a standard nationwide approach to paying for it as if it were energy supply that opens the doors to this new class of market participants who aggregate customers and manage their energy demand to optimize their energy performance and thus savings potential as well as create recurring revenue from constant energy management of demand response.

So what, you ask?

The disruptive technologies being used to identify, aggregate, capture and mitigate energy demand through demand response and constant energy management are transforming the nature of the energy business.  They give customers more control, optimize the productive use of energy across the business and across the energy value chain, but they do more than that.

Customer aggregation starting with demand response can revolutionize the energy value chain by opening the door wider to a distributed energy future using combined heat and power strategies, waste heat recovery systems, microgrids, building automation, and the leveraged use of energy efficiency and demand response to accelerate the transition to our clean, distributed energy future.

More importantly, customer aggregation plus the ability to scale it across regional markets and across the country on standard terms based upon the FERC guidelines is a huge step toward the national scale necessary not just for demand response but for smart grid optimization, renewable energy access and the re-opening of the door to retail access by end use customers.

Without scalable national markets many of the disruptive technologies offering the most potential for positive benefits for consumers and the industry simple are not possible.  Scale is required to drive costs down to grid parity levels in renewable energy.  Scale is required to enable the benefits of smart grid from outage management, optimization and energy security.  Scale is required for software, sensor, gadget makers and other vendors eager to bring new products and services to market.  Scale also brings standards for interoperability, common market rules, and the production capacity to extract value worth the aggravation.

The distributed energy future of our clean energy economy is one replete with practical business cases today for using disruptive technology and new rules to create scalable markets for demand response and renewable energy, but getting to scale requires the kind of national rules and standards FERC is working toward today.  Customer aggregation has the potential to fundamentally alter the relationships between utilities and breaches the gateway to customers they have controlled for one hundred years.  The tools for breaching the gateway are found in the disruptive technology of customer aggregation.